China Consumer Inflation Edges up in May -- Update

China's consumer prices accelerated at a modest pace in May, with inflation in the world's second-largest economy expected to remain muted for the rest of the year.

China's consumer-price index in May showed a rise in prices of 1.5% from a year earlier, accelerating from April's 1.2% pace, the National Bureau of Statistics said Friday. The May reading matched a forecast by economists polled by The Wall Street Journal.

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Producer prices rose 5.5% in May from a year earlier, in line with expectations, slowing from April's 6.4% pace.

Given a relatively benign inflation environment and recent monthly CPI readings well below the government's 3% annual ceiling, policy makers are expected to maintain relatively high short-term interest rates and continue tightening financial regulations in a bid to spur deleveraging. The International Monetary Fund is set to release its annual review of the Chinese economy next week that is expected to include warnings about rapidly rising corporate debt.

Beijing's recent mission to contain financial risks was made easier by a relatively strong first quarter, which helped ease concern that measures to rein in debt would jeopardize its growth target for the year of about 6.5%. However, economists caution that Beijing faces a delicate balancing act.

"Food prices are extremely soft these days, and commodity prices are losing momentum, so I don't expect any turnaround in policy," said Commerzbank AG economist Zhou Hao. "But if they tighten too much, they could kill real demand if the real economy has trouble getting funding."

Countering these were food prices, which fell 1.6% last month after a 3.5% drop in April. Egg and pork prices in particular saw double-digit declines after earlier elevated prices encouraged farmers to raise more pigs and chickens, leading to an oversupply.

Economists said they don't expect consumer inflation to speed up significantly this year. Higher interest rates and tighter monetary policy risk denting corporate profits and eroding personal incomes, while tighter restrictions on home buying are expected to stem rent increases and discourage spending on furniture, they said.

Cui Pengyu, a 28-year-old software engineer working for a steel company in the northern city of Baotou, said prices for the vegetables he buys to make steaming hot pot stews have more than halved since last winter even as costs for basic household items rise modestly.

For a worker in a bloated sector like steel, that is helpful at a time of uncertainty. "I'm worried about losing my job," Mr. Cui said. "These days, I'm a bit more careful with my spending."

After reaching a peak of 7.8% in February, price increases at the factory gate have lost momentum on weakening commodity prices, including a 30% drop in iron ore prices in recent months. This has cut into profits for large industrial firms, which rose 14% year over year in April, down from 28% in the first quarter. China's industrial sector accounts for about a third of the nation's economy.

Economists said they expect factory-price inflation to continue weakening, with UBS forecasting that the producer-price index will decelerate to 4% to 5% in the third quarter and to 2% to 3% toward the end of the year.

"Hopes for a more sustained period of reflation that would help erode the country's growing debt burden are likely to be disappointed," said Capital Economics in a report. "If the economy slows in the coming months as we expect, broader price pressures are likely to cool."